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Standard Costs and Variances

Standard Costs and Variances. Chapter 10. Standard Costs. Standards are benchmarks or “norms” for measuring performance. In managerial accounting, two types of standards are commonly used. Quantity standards specify how much of an input should be used to make a product or provide a service.

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Standard Costs and Variances

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  1. Standard Costs and Variances Chapter 10

  2. Standard Costs Standards are benchmarks or “norms” formeasuring performance. In managerial accounting, two types of standards are commonly used. Quantity standardsspecify how much of aninput should be used tomake a product orprovide a service. Price standardsspecify how muchshould be paid foreach unit of theinput. Examples: Firestone, Sears, McDonald’s, hospitals, construction, and manufacturing companies.

  3. Standard Quantityper Unit Final, deliveredcost of materials,net of discounts. Summarized in a Bill of Materials. Setting Direct Materials Standards Standard Priceper Unit

  4. Standard Rateper Hour Standard Hoursper Unit Often a singlerate is used that reflectsthe mix of wages earned. Use time and motion studies foreach labor operation. Setting Direct Labor Standards

  5. PriceStandard QuantityStandard The rate is the variable portion of the predetermined overhead rate. The quantity is the activity in the allocation base for predetermined overhead. Setting Variable Manufacturing Overhead Standards

  6. The Standard Cost Card A standard cost card for one unit of product might look like this:

  7. Using Standards in Flexible Budgets Standard costs per unit for direct materials, direct labor, and variable manufacturing overhead can be used to compute activity and spendingvariances. Spending variances become more useful by breaking them down into price and quantity variances.

  8. Quantity Variance Price Variance Difference betweenactual quantity and standard quantity A General Model for Variance Analysis Variance Analysis Difference between actual price andstandard price

  9. The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used. • The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production. Price and Quantity Standards Price and quantity standards are determined separately for two reasons:

  10. A General Model for Variance Analysis Variance Analysis Price Variance Quantity Variance Materials price varianceLabor rate varianceVOH rate variance Materials quantity variance Labor efficiency variance VOH efficiency variance

  11. A General Model for Variance Analysis (3) Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP) (1)Actual Quantityof Input,at Actual Price (AQ × AP) (2)Actual Quantityof Input,at Standard Price(AQ × SP) Price Variance(2) – (1) Quantity Variance(3) – (2) Spending Variance(3) – (1)

  12. A General Model for Variance Analysis Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used. (3) Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP) (1)Actual Quantityof Input,at Actual Price (AQ × AP) (2)Actual Quantityof Input,at Standard Price(AQ × SP) Price Variance(2) – (1) Quantity Variance(3) – (2) Spending Variance(3) – (1)

  13. A General Model for Variance Analysis Standard quantity is the standard quantity allowed for the actual output of the period. (3) Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP) (1)Actual Quantityof Input,at Actual Price (AQ × AP) (2)Actual Quantityof Input,at Standard Price(AQ × SP) Price Variance(2) – (1) Quantity Variance(3) – (2) Spending Variance(3) – (1)

  14. A General Model for Variance Analysis Actual price is the amount actuallypaid for the input used. (3) Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP) (1)Actual Quantityof Input,at Actual Price (AQ × AP) (2)Actual Quantityof Input,at Standard Price(AQ × SP) Price Variance(2) – (1) Quantity Variance(3) – (2) Spending Variance(3) – (1)

  15. A General Model for Variance Analysis Standard priceis the amount that shouldhave been paid for the input used. (3) Standard QuantityAllowed for Actual Output,at Standard Price(SQ × SP) (1)Actual Quantityof Input,at Actual Price (AQ × AP) (2)Actual Quantityof Input,at Standard Price(AQ × SP) Price Variance(2) – (1) Quantity Variance(3) – (2) Spending Variance(3) – (1)

  16. Learning Objective 1 Compute the direct materials price and quantity variances and explain their significance.

  17. Materials Variances – An Example Glacier Peak Outfitters has the following direct materials standard for the fiberfill in its mountain parka. 0.1 kg. of fiberfill per parka at $5.00 per kg. Last month 210 kgs. of fiberfill were purchased and used to make 2,000 parkas. The materials cost a total of $1,029.

  18. Price variance$21 favorable Quantity variance$50 unfavorable Materials Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000

  19. 0.1 kg per parka  2,000 parkas = 200 kgs Price variance$21 favorable Quantity variance$50 unfavorable Materials Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000

  20. $1,029  210 kgs = $4.90 per kg Price variance$21 favorable Quantity variance$50 unfavorable Materials Variances Summary Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 210 kgs. 210 kgs. 200 kgs. × × × $4.90 per kg. $5.00 per kg. $5.00 per kg. = $1,029 = $1,050 = $1,000

  21. Materials Variances:Using the Factored Equations Materials price variance MPV = (AQ × AP) – (AQ × SP) = AQ(AP – SP) = 210 kgs ($4.90/kg – $5.00/kg) = 210 kgs (– $0.10/kg) = $21 F Materials quantity variance MQV = (AQ × SP) – (SQ × SP) = SP(AQ – SQ) = $5.00/kg (210 kgs – (0.1 kg/parka  2,000 parkas)) = $5.00/kg (210 kgs – 200 kgs) = $5.00/kg (10 kgs) = $50 U

  22. Purchasing Manager Production Manager Responsibility for Materials Variances Materials Price Variance Materials Quantity Variance The standard price is used to compute the quantity varianceso that the production manager is not held responsible forthe purchasing manager’s performance.

  23. Your poor scheduling sometimes requires me to rush order materials at a higher price, causing unfavorable price variances. I am not responsible for this unfavorable materialsquantity variance. You purchased cheapmaterial, so my peoplehad to use more of it. Responsibility for Materials Variances Production Manager Purchasing Manager

  24. Zippy Quick Check  Hanson Inc. has the following direct materials standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week, 1,700 pounds of materials were purchased and used to make 1,000 Zippies. The materials cost a total of $6,630.

  25. Zippy Quick Check  How many pounds of materials should Hanson have used to make 1,000 Zippies? a. 1,700 pounds. b. 1,500 pounds. c. 1,200 pounds. d. 1,000 pounds.

  26. Zippy The standard quantity is: 1,000 × 1.5 pounds per Zippy. Quick Check  How many pounds of materials should Hanson have used to make 1,000 Zippies? a. 1,700 pounds. b. 1,500 pounds. c. 1,200 pounds. d. 1,000 pounds.

  27. Zippy Quick Check  Hanson’s materials quantity variance (MQV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  28. Zippy MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable Quick Check  Hanson’s materials quantity variance (MQV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  29. Zippy Quick Check  Hanson’s materials price variance (MPV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  30. Zippy MPV = AQ(AP - SP) MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable Quick Check  Hanson’s materials price variance (MPV)for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.

  31. Zippy Price variance$170 favorable Quantity variance$800 unfavorable Quick Check  Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb. = $6,630 = $ 6,800 = $6,000

  32. Zippy Price variance$170 favorable Quantity variance$800 unfavorable Quick Check  Recall that the standard quantity for 1,000 Zippiesis 1,000 × 1.5 pounds per Zippy = 1,500 pounds. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb. = $6,630 = $ 6,800 = $6,000

  33. Learning Objective 2 Compute the direct labor rate and efficiency variances and explaintheir significance.

  34. Labor Variances – An Example Glacier Peak Outfitters has the following direct labor standard for its mountain parka. 1.2 standard hours per parka at $10.00 per hour Last month, employees actually worked 2,500 hours at a total labor cost of $26,250 to make 2,000 parkas.

  35. Rate variance$1,250 unfavorable Efficiency variance$1,000 unfavorable Labor Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × ×$10.50 per hour $10.00 per hour $10.00 per hour = $26,250 = $25,000 = $24,000

  36. 1.2 hours per parka  2,000 parkas = 2,400 hours Rate variance$1,250 unfavorable Efficiency variance$1,000 unfavorable Labor Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × ×$10.50 per hour $10.00 per hour $10.00 per hour = $26,250 = $25,000 = $24,000

  37. $26,250  2,500 hours = $10.50 per hour Rate variance$1,250 unfavorable Efficiency variance$1,000 unfavorable Labor Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × ×$10.50 per hour $10.00 per hour $10.00 per hour = $26,250 = $25,000 = $24,000

  38. Labor Variances: Using the Factored Equations Labor rate variance LRV = (AH × AR) – (AH × SR) = AH (AR – SR) = 2,500 hours ($10.50 per hour – $10.00 per hour) = 2,500 hours ($0.50 per hour) = $1,250 unfavorable Labor efficiency variance LEV = (AH × SR) – (SH × SR) = SR (AH – SH) = $10.00 per hour (2,500 hours – 2,400 hours) = $10.00 per hour (100 hours) = $1,000 unfavorable

  39. Mix of skill levelsassigned to work tasks. Level of employee motivation. Quality of production supervision. Production Manager Quality of training provided to employees. Responsibility for Labor Variances Production managers areusually held accountablefor labor variancesbecause they caninfluence the:

  40. I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment. I am not responsible for the unfavorable laborefficiency variance! You purchased cheapmaterial, so it took moretime to process it. Responsibility for Labor Variances

  41. Zippy Quick Check  Hanson Inc. has the following direct laborstandard to manufacture one Zippy: 1.5 standard hours per Zippy at$12.00 per direct labor hour Last week, 1,550 direct labor hours wereworked at a total labor cost of $18,910to make 1,000 Zippies.

  42. Zippy Quick Check  Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.

  43. Zippy LRV = AH(AR - SR) LRV = 1,550 hrs($12.20 - $12.00) LRV = $310 unfavorable Quick Check  Hanson’s labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.

  44. Zippy Quick Check  Hanson’s labor efficiency variance (LEV)for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable.

  45. Zippy LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable Quick Check  Hanson’s labor efficiency variance (LEV)for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable.

  46. Zippy Rate variance$310 unfavorable Efficiency variance$600 unfavorable Quick Check  Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 1,550 hours 1,550 hours 1,500 hours × × × $12.20 per hour $12.00 per hour $12.00 per hour = $18,910 = $18,600 = $18,000

  47. Learning Objective 3 Compute the variable manufacturing overhead rate and efficiency variances and explain their significance.

  48. Variable Manufacturing Overhead Variances – An Example Glacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain parka. 1.2 standard hours per parka at $4.00 per hour Last month, employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for the month was $10,500.

  49. Rate variance$500 unfavorable Efficiency variance$400 unfavorable Variable Manufacturing Overhead Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600

  50. 1.2 hours per parka  2,000 parkas = 2,400 hours Rate variance$500 unfavorable Efficiency variance$400 unfavorable Variable Manufacturing Overhead Variances Summary Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 2,500 hours 2,500 hours 2,400 hours × × × $4.20 per hour $4.00 per hour $4.00 per hour = $10,500 = $10,000 = $9,600

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